The Walt Disney Co (DIS) of today is about much more than Mickey Mouse, Goofy and the Magic Kingdom. And that’s a good thing.
It’s also about Marvel Studios, ESPN and — in perhaps its biggest financial coup to date — Star Wars. That kind of diversity has broadened Disney’s appeal to an older audience.
It’s also one reason for the rollercoaster ride in Disney stock of late.
Disney has made plenty of headlines in recent months — some good, some bad.
Bad News Hurting Disney Stock
First, the good. Star Wars: The Force Awakens hit theaters in late December amid almost unprecedented hype, and it hasn’t disappointed — it’s already the third-highest grossing movie of all time, with just over $2 billion at the box office worldwide.
And oh, by the way, there are two more films in this Star Wars trilogy to come in 2017 and 2019.
The success of Star Wars comes on the heels of four other Disney-owned movies — The Avengers (2012), Frozen (2013), Iron Man 3 (2013) and The Avengers: Age of Ultron (2015) — that cracked the top 10 in all-time global box-office sales. Disney owns the Avengers franchise after purchasing Marvel for $4 billion in 2009 — the same price it paid for the Star Wars franchise in 2012.
Combined, those five movies have grossed more than $7 billion worldwide (so far) — and that doesn’t even take into account the merchandising opportunities that come with their immense popularity. Star Wars alone is expected to rake in $5 billion in sales of toys, video games and other products this year!
So that’s the good news, and it’s the reason Disney stock got a healthy 21% bump in October and November as The Force Awakens premier drew near.
ESPN has been responsible for the bad news.
Subscriptions to “The Worldwide Leader in Sports” have been on sharp decline the last two years, falling from 99 million subscribers to 92 million as Americans “cut the cord” due to the increasingly high costs of cable and the prevalence of cheaper online streaming alternatives such as Netflix, Inc. (NFLX), Amazon.com, Inc. (AMZN) and Hulu. With subscriber numbers dwindling, ESPN laid off more than 4% of its work force in October.
That’s not good publicity, nor is the loss of 7 million subscribers good for the bottom line. In essence, ESPN has been an unfortunate counterbalance to Disney’s booming movie business — a bucket of cold water dousing the flames of the company’s red-hot box-office sales.
Fortunately, most of that cold water is borne out of investor perception. In reality, Disney’s movie business — as well as its still-thriving theme parks, where operating income improved 22% in the fourth quarter — have been more than enough to overcome its ESPN problem. Total sales for DIS actually increased 13.8% last quarter, while earnings per share improved nearly 36% — the best top- and bottom-line quarterly results the company has posted in years.
The $52.5 billion in revenue Disney generated in 2015 marked a 7.8% increase from 2014.
So, while its ESPN problem is a hit to Disney’s image — and, more importantly, Disney stock — the reality is that the company is doing more than enough good things to make ESPN little more than a flesh wound.
What ESPN has done, however, is create a nice buying opportunity for bargain hunters seeking a long-term investment in a very strong company — with a stock that has quintupled in value since February 2009.
Market Overreaction = Perfect Time to Buy DIS
Wall Street tends to overreact to unflattering headlines, which is why DIS stock squandered all its pre-Star Wars gains from late November to early February, when it bottomed at $88. Now at $97, Disney stock is back on the uptick, yet still trading at just 16 times next year’s earnings estimates.
With earnings expected to expand 13.4% in 2016 and another 7% in 2017, that’s a pretty reasonable price tag. (Sales are expected to grow 7.5% this year and 5% next year, by the way.) And remember: there are still two more Star Wars movies to come in the trilogy alone, and at least two more Avengers movies, due out in 2018 and 2019. And Disney World isn’t shutting down anytime soon.
Even if ESPN continues to bleed cord-cutting subscribers, Disney should continue to grow at a healthy rate for the foreseeable future. Eventually, investors will realize how oversold DIS stock has become — in fact, they’re already starting to.
Best to buy Disney stock now before too many realize their mistake.
As of this writing, Chris Fraley did not hold a position in any of the aforementioned securities.
